The ability to obtain catastrophe loss or catastrophe hazard insurance protection for real property is a significant issue, especially in locations that are prone to natural disasters. Examples of locations with higher risk of catastrophic hazard occurrence include the earthquake-prone state of California and the south-eastern United States situated in the hurricane belt. Property owners in these areas may have difficulty securing catastrophe insurance, and in many cases this may also translate to difficulty in securing non-catastrophe hazard insurance (such as fire and flood insurance). There may be situations in years to come where, due to rising oceans or other waters from “global warming,” that properties on neighboring areas will not be able to get flood insurance. If a catastrophe such as an earthquake, flood, or hurricane does damage an owner's real property, an owner is faced with an unattractive array of financial choices ranging from defaulting on the property's mortgage to taking out another loan to rebuild, in addition to paying the existing mortgage.
Insurance companies and mortgage lenders are also impacted by this situation. A broad market of potential customers is not being fully served due to the risk of catastrophe in their areas. Holding catastrophe hazard risk as an insurer or a bank is speculative, especially for properties in areas with higher risk.
A need exists to provide catastrophe hazard insurance to property owners in areas with higher risk of catastrophe in a manner that benefits property owners and that is not unduly risky to insurers/lenders.